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By DAVID RANSON

Recently I got mail from a credit card company inviting me to open a “high-yield” savings account with a “competitive” interest rate of 0.85 percent. I asked myself, again, whether people have become so accustomed to the Fed’s zero interest rate policy that they will go on entrusting the money market with their cash on such meager terms.

The nation’s supply of financial capital consists largely of the flow of savings from American households. What if they might as well put their dollar bills under the mattress? At zero interest, and with numerous government inducements to boost consumer spending, it’s not realistic to expect savers and conservative investors to fuel the national growth engine as they have in the past.

Why would they? Quantitative easing and zero interest rates are pushing them into an intolerable situation, one that looks set to last. Washington fails to recognize that deficit spending, low economic growth, labor-force decline and artificially low interest rates have become a vicious spiral. As I’ve argued before, the growth of public debt crowds out the financing of private enterprise and deprives it of capital. And monetizing the debt has been as ineffectual as fiscal stimulus.

Prolonged financial repression is destroying the integrity of cash as a medium for saving. Savers and investors are being pushed into taking on unwanted risk and volatility. Washington has taken off the table the classic risk-free vehicle to which private investors can safely allocate part of their wealth. This has made me wonder whether there are other ways of preserving capital while earning a decent return at the same time.

While it’s true that all assets are risky and volatile, there’s good historical evidence that it’s possible to produce safety out of risk. It may sound like alchemy, but there’s no doubt that a mix of volatile assets can deliver the desirable combinations of stability and return that cash used to offer – as long as these assets bear sufficiently strong inverse correlations to one another.

Investors may have come to think that safety itself has ceased to be an achievable financial goal, but that is too pessimistic. We all try to sidestep efforts by outsiders to constrain our lives. In the financial arena, markets perform this vital function on our collective behalf. Financial innovation can design an investment vehicle that is so dependable, remunerative and stable – especially stable – that it can be a substitute for cash in the capital markets. The challenge is to craft an asset mix that takes maximum advantage of the inverse correlations that are out there. The secret of that is, in turn, to select asset classes with polar-opposite responses to the economic winds.

One example is the relationship between returns from stocks and gold. It is not just inverse, but highly inverse, lasting, and – best of all – consistent over time. Why? Because the inflow of private capital that fuels business enterprise, and expands the economy, is deterred by currency depreciation. As the dollar rises or falls, the price of gold moves in the opposite direction. As capital flows in and out, equity prices advance and decline. From year to year, and even from decade to decade, equities and gold move against one another in see-saw fashion.

Other instances include assets such as commodities and foreign equities, which tend to be inversely related to high-quality bonds. Combining pairs of inversely related assets makes possible a degree of diversification that goes far beyond benchmarks such as the traditional mix of stocks and bonds.

The chart nearby compares the cumulative value of $1 invested back in 1970 in constant mixes of four primary asset classes: stocks, bonds, gold and commodities. The volatility of collective return depends on the formula by which the four are weighted and rebalanced. There are countless schemes, of which just two are illustrated here. Neither is an optimal design, but they’re good enough to illustrate my point.

The term “permanent portfolio” was introduced by financial author and presidential aspirant Harry S. Browne in the 1980s, and he prescribed the simplest of formulas: equal weights. The other scheme in the chart follows the doctrine of “risk parity” advocated by investment guru Ray Dalio: each asset is given a weight that equalizes the four contributions to the variance, the so-called “risk,” of the mix. Both portfolios, rebalanced regularly, trounce the return from cash in the form of 30-day Treasury bills.

Average return and year-to-year volatility are shown for all three trajectories. It’s clear that a constant mix of selected assets, even without optimization, can mimic the stability of cash with a higher return both historically and prospectively. While such asset mixes cannot rival the stability as cash on a weekly or monthly basis, I find they can be more stable than cash over multi-year horizons.

Because the Fed manipulates the price of short-term government paper at will, capital appreciation readily falls prey to a zero interest-rate policy. Permanent portfolios like those in the chart are a way to guard against this. They are much less vulnerable. Another conceptual advantage is the opportunity to customize a constant asset mix for a specific purpose. For example, one could be crafted to minimize the volatility, not merely of nominal returns, but of inflation-adjusted returns. That would address a universally desired investment goal which has long been beyond the reach of cash itself.

Stung by the Fed into action, I can foresee a future proliferation of competing investment funds that would bring highly stable asset mixes at low cost to the financial marketplace. Beyond that, I could even imagine some similar vehicle, once investors have established a market for it, supplanting traditional cash in the end as a medium of exchange as well. Though quite different from BitCoin, this could serve the same purpose: an irrepressible form of private money.

David Ranson is head of research at H. C. Wainwright & Co. Economics in Cambria, CA.